'Me Decade' Looms for Oil Users

By Don OberdorferBy Don OberdorferMarch 23, 1980

The redoubling of international oil prices last year has set the stage for widespread economic and political disorders that are likely to make the 1980s a decade of tension and danger, according to American observers of the global scene.

In reaction to an unprecedentedly large -- and open-ended -- transfer of wealth to oil-exporting nations, the margins of growth and security in most of the world have diminished. As a result, governments and political leaders have been weakened and some have already succumbed to diseases of inflation and slump, or the bitter taste of the strong medicine prescribed to deal with them. And political weakness has made it more difficult to deal with the causes and symptoms of "OPEC disease."

As nations and individuals scramble to protect themselves against threats to their interest and way of life, sacrifices and commitments in long-term effort are becoming more difficult, and the search for short-term gains at the expense of others more prevalent. There is concern that the 1980s may be the "me decade" of nations as the 1970s were for many individuals, with rising risks of collision amid high tension and diminished patience.

As later articles in this series will show, the fate of individual nations is beyond their control to a greater extent than ever. And as will also be explored, only Germany and Japan of the major industrial democracies are demonstrating ability to adjust to the jolts in the global economy.

"A worldwide economic problem of enormous dimension is feeding back into the domestic and foreign policies of the United States and many other countries," said C. Fred Bergsten, assistant secretary of the treasury for international affairs, in an interview about economic conditions in the 1980s.

"Twenty years ago the great problem in the world was arms and arms control. Today it is economic -- the underlying problem of oil resources and prices and the stress it places on how nations behave," said Ronald I. Spears, director of the State Department's Bureau of Intelligence and Research.

"Globally I can't see things becoming better until late in this decade. The real question is whether they will become only moderately worse or dramatically worse," said Robert Hormats, a former National Security Council and State Department official who is current deputy U.S. trade representative.

Not all the troubles of a troubled world can be traced to the economics-and-energy bind associated with spurting oil prices. Nonetheless, there is a consensus among experts that the oil emergency has deepened serious difficulties that already existed and has created new ones of its own.

The current economic distress of the United States is the rule rather than the exception. Like that of many other nations, the U.S. economy has been deeply affected by the 1979 leap in oil prices, which is expected to boost this country's petroleum import bill from $42 billion in 1978 to well over $80 billion this year.

An $80 billion oil import bill is the equivalent of half the Pentagon's new budget, or half the total sum to be spent this year on all education in this country, public and private. It is about ten times the proposed U.S. budget for all forms of aid to countries abroad. It amounts to $370 for every man, woman and child in the United States.

Serious as it is, the impact of the price hikes on the United States is not as stark as that facing many nations. In recent years this country has imported about 45 percent of the petroleum it used, meaning that 55 percent was produced at home. The United States possesses choices and resources beyond the reach of less wealthy and less wasteful nations, including powerful action to reduce imports.

The disparity of circumstances and interests is a cause of strain between Washington and its allies in Western Europe and Japan, which have scarcely any domestic oil and thus live closer to the edge of catastrophe. They are more cautious about any word or deed that could irritate the oil producers or endanger oil supplies.France and Germany, among others are bidding for special oil and financial deals in the Middle East.

The political effect of economic conditions, summed up in the adage that American "vote their pocketbook," can be felt throughout the world in popular pressures and parliamentary power. Even in communist and totalitarian states, the political effect of prices, wages and production is a fact of life.

Although the surface causes were diverse, it seems more than a striking coincidence that in 1974, the year of inflation and slump following the global oil price shock of 1973, political leadership turned over in all six of the largest noncommunist industrial countries, the United States, Japan, West Germany, France, Britian and Italy.

In the first three months of this year, the newest oil shock is already taking a political toll.

In Canada, Prime Minister Joe Clark's proposal for an 18 cents-per-gallon gasoline tax hike and an austerity budget were among major factors in his sudden ouster last month by opposition leader (and former prime minister) Pierre Elliot Trudeau.

In Thailand late last month, Prime Minister Kriangsak Chomanan responded to the global crisis by sharply raising kerosene and gasoline prices. His government fell within a week.

In India, inflation played a role in driving Prime Minister Indira Gandhi out of power three years ago, and her successor's inability to deal with it effectively was considered even more important to Gandhi's resounding return to office this January.

Even communist Poland responded to international payments trouble by dumping Prime Minister Piotr Jaroszewicz last month. Poland has incurred heavy external debts but is wary of the severe austerity recommended by international bankers. Communist Party chief Edward Gierek, the top political leader, came to power as a result of economy-related riots in 1970 that ousted his predecessor. Gierek's rule was threatened by "food riots" that broke out in 1976.

As more countries are pushed close the edge of the economic precipice, relatively smooth transitions may give way to radical solutions matching the increasingly strident rhetoric and emotion of the Third World. "In general this does not look to be a good decade for moderate government," said a State Department official with a worldwide view. An official of the Latin American bureau added: "The skillss of the Cubans are far more revelant to management of stagnation and poverty than to an economy of growth."

Nearly every nation on earth is affected to some degree by the oil price hikes including the Organization of Petroleum Exporting Countries (OPEC) members confronted with the task of absorbing and distributing their new wealth. An economic "watch list" of countries hardest hit by the rising prices, as compiled by Treasury and State Department officials, includes several with unsettled political conditions as well:

Brazil, the giant of Latin America, which has piled up nearly $50 billion in debt and is forced to spend nearly all its export earnings just to service the debt and pay for oil. Increasingly austere economic conditions combined with reduced funds for social services could bring unrest in a country having very widespread poverty as well as pockets of great wealth.

South Korea, whose oil bill has skyrocketed from $3 billion to nearly $6 billion, a staggering sum for a country whose total yearly output of goods and services is $61 billion following the assassination last fall of President Park Chung Hee, Korea's insecure civilian government lives in the shadow of potential takeover by the South Korean military.

Turkey, whose high debt payments and oil costs eat up virtually all its foreign exchange earnings. Economic reverses have contributed to a succession of weak governments beset by radicalism of the left and right. "I believe Turkey would be a stable country today except for the increase in oil prices." said the State Department's Spiers, formerly U.S. ambassador there.

Jamaica, which is considered by U.S. officials to be in a state of social economic and political crisis. The island is past due on its payments to foreign commercial banks, causing the International Monetary Fund to suspend assistance. "The only question is how sharp the decline in the standard of living there is going to be," said a State Department official.

The Phillipines, where soaring oil imports costs eat up nearly 50 percent of export earnings, according to a U.S. estimate. After eight years of martial law rule, the regime of President Ferdinand Marcos appears to be in deepening economic and political trouble.

The bulk of the massive $250 billion debt of these and other Third World countries has been piled up since the "first oil crisis" of 1973. A large-scale flow of outside funds, most of it from private banks, rescued many nations and the international financial system from disaster in the 1970s. But with debts already high and repayment ability in doubt, massive new infusions of private credit are now less likely.

Most of the private credit has gone to a few rapidly growing industrialized countries, such as Brazil and South Korea. Poorer nations have had to rely on official aid in the form of grants or loans. But although there was a dramatic increase in official aid in the 1970s -- which was to be the "decade of development" throughout the world -- aid flows now have been outspaced by the sudden price increase of the "second oil crisis" in 1979.

According to data compiled by the Paris-based Organization for Economic Cooperation andDevelopment, aid-monitoring organization of the noncommunist industrial world, official aid from sources to the developing world increased from $13 billion in 1973 to $29 billion in 1979. But in that same interval, the oil import bill of the developing nations increased from $8 billion to $39 billion.

This year, according to OECD estimates which do not reflect the full impact of the new price hikes, the oil import bill of the developing nations will be at least $55 billion -- nearly twice as much as the $32 billion in official aid.

Due to their own economic distress, the advanced countries are not expected to increase foreign aid as they did in the 1970s and some actually may make cuts. For example, Congress recently signaled heavy reductions in contributions to the World Bank and other aid-dispensing institutions. Both Congress and the White House facing painful austerity programs at home, are sharpening the knife for new reductions in the 1981 foreign aid budget.

Nor is the prospect bright for developing countries on the trade front. A near-simultaneous economic slump throughout the industrial world may cut into the raw materials sales of the developing nations. Rising protectionism, as each nation seeks to sell more and import less in order to pay for oil, could add to the troubles of weaker economies.

The transfer of wealth to the oil-producing countries, according to economic historians, is the largest of this century, rivaled only by the reparations that stripped Germany of its wealth after World War I (and led to World War Ii). Felix G. Rohatyn, a New York investment broker, calculated that at present rates the United States in the next five years will pay for imported oil -- a product burned up daily -- a sum equal to about half the total value of all companies listed on the New York Stock Exchange.

A source of deep concern is that the redoubled price of oil is more likely to go up again, either moderately or dramatically, than to remain stable or go down.

The OPEC takeover of control following the 1973 Middle East war led to a four-fold increase in prices -- from about $3 a barell to more that $11 at official prices. As the world adjusted, prices in 1974-78 climbed modestly, and actually declined slightly after allowing for inflation.

The redoubling of oil prices in 1979, from about $14 a barrel to nearly $29, was touched off by the Iranian revolution and oil production cutback. This unexpected interruption by a major producer in an already tight market led to hoarding, panic buying, gasoline lines in the United States and skyrocketing prices as everyone scrambled for available supplies.

According to a recent State Department study, it is now clear that there was a "phychological shortage" of oil byut no physical shortage. "The loss in Iranian production was more than matched over the first half of 1979 by increases in production and exports by other producers," the study last month said.

Among factors contributing to the panic were uncertainty and the belief that the market would be tighter in the future. Another factor, according to the report, was a shift by producing countries from long-term sales arrangements with the major international oil firms to direct sales, many on the competetive "spot market."

The fundamental problem is that the world's energy consumption has outstripped the increase in energy supplies, using up the cushion of spare oil production capacity in the global system. World oil production is not expected to increase much in this decade, and new sources of energy on a mass production basis will not be ready before late in the decade, if then.

In the immediate future, a world-wide economic slump, combined with conservation due to high prices, is expected to ease the demand for oil. But some OPEC countries are reducing their production to keep the market tight.

While the world awaits new sources, it is at the mercy of the oil-producing countries. And as 1979 illustrated, even OPEC's control is minimal when a production stoppage or scare sets off a round of panic buying.

The ultimate nightmare is a stoppage or radical change in policy in Saudi Arabia, the giant of the oil exporters. And this most vital country is undergoing history's most rapid change from poverty to riches.

With economies and political leaders in the balance, oil has become a strategic commodity. The Persian Gulf, with most of the world's available reserves, has become a center of strategy.

The Soviet invasion of Afghanistan, a wedge of territory close to the Persian Gulf, caused Egyptian and Israeli leaders as well as some U.S. strategists to say that the "wars for oil" have begun. Saudi Oil Minister Zaki Yamani said, "The heat is coming nearer the oil fields, and it is very dangerous to have heat near oil." Other leaders and analysts are far more concerned about disorders within nations of the region, including revolution on the Iranian model, than invasion from outside.

President Carter has declared the Persian Gulf to be vital to the United States, and promised military action if it is threatened from outside. The United States is building forces and military support facilities in the area. u

The consensus of U.S. officials interviewed for this report is that a military conflict over oil is unlikely in the foreseeable future. But with tensions rising between East and West and between the developed North and the underdeveloped South, the possibility seems less preposterous than it did a year ago.

When their livelihood is interrupted or prices rise out of control, people react economically and politically. When they believe their fuel or food to be actually threatened, people fight.

Experienced officials said the decade ahead need not come to that. It has been widely predicted after 1973, they pointed out, that the world faced collapse or war over oil, but the system proved inventive and resilient enough to cope through the rest of the 1970s.

But even those who feel the disorder can be contained do not expect a sunny decade. "You can't expect much but bad news in the 1980s," said a senior intelligence official.